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|Vaibhav Saxena, lawyer at Vietnam International Law Firm|
A number of huge M&A deals have drawn a bright picture for upwards development of related activities in Vietnam. At the beginning of 2019, state-owned Vietcombank successfully issued over 110 million shares for GIC Private Ltd. of Singapore and Japan’s Mizuho Bank Ltd. This transaction brought a huge increase of approximately $265 million to Vietcombank’s charter capital and created a foundation for satisfaction of capital safety requirements under Basel II standards.
Six months later BIDV, another state-owned bank, succeeded in the sale of 15 per cent stake to a foreign strategic shareholder, KEB Hana Bank from South Korea. In May, Vingroup signed a strategic partnership agreement with SK Group in which the South Korean side purchased $154.3 million shares through Vingroup’s private placement and $51.4 million secondary shares from Vincommerce, totalling approximately $1 billion.
Amongst the 117 nations and territories with foreign invested projects in Vietnam, investors from Hong Kong, South Korea, Singapore, Thailand, Japan, and India are the key M&A players. Japanese investors are particularly interested in insurance and logistics. Sumitomo Life invested $173 million to purchase 41.4 per cent of stakes via Bao Viet Corporation’s private placement in one example.
New movements ahead
A new investment trend has been emerging in the Vietnamese market. A number of leading domestic conglomerates such as Vingroup, KIDO, Masan, Vinamilk, Saigon Co.Op and Truong Hai have been expanding their business through M&A transactions, with the trend set to develop further in 2020.
In the final days of 2019, one of the biggest M&A deals took place in the country between Masan and Vingroup to form the country’s largest retail corporation. Looking ahead, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA), are expected to give a further push to M&A investment in Vietnam.
Under the CPTPP, Vietnam is committed to an open market for a number of financial services including new services or products that have never been provided in Vietnam previously, and electronic payment services for transactions. In the financial sector, Vietnam is inclined towards fintech and committed to ensuring equal treatment to foreign investors in relation to acquisitions, sales, or other disposition of financial institutions and investments in financial institutions across the country.
This means the CPTPP is allowing overseas banks to purchase shares of Vietnamese commercial banks to a certain extent. Prior to joining the CPTPP, Vietnam has attracted several strategic shareholders investing in major state-owned banks such as VietinBank, Vietcombank, and BIDV.
With the changes of major laws governing M&A activities such as those on investment, enterprises, and securities, Vietnam’s commitments under the CPTPP promise to bring an enormous investment wave in the banking and financial sector of Vietnam from financiers of CPTPP signatories such as Australia, Canada, Mexico, and New Zealand, to name a few.
Vietnam is also going to ratify the EVFTA in 2020. It was divided into two agreements: the free trade agreement itself, and the EU-Vietnam Investment Protection Agreement (EVIPA). Under the framework, European investors are permitted to contribute capital via the purchase of shares from Vietnamese enterprises.
In terms of purchasing shares in the banking industry, Vietnam’s specific commitments as part of the World Trade Organization permits foreign investors to hold no more than 30 per cent of the charter capital of the commercial bank. This remains unchanged under the EVFTA. However, Vietnam also signed with the EU a memorandum on capital contribution in the banking sector providing an exception on shareholding ratio of European credit institution in Vietnam.
It stated that within five years of the effective date of the EVFTA, Vietnam is committed to considering the proposal of the EU to increase the ownership ratio of the bloc’s credit institutions to 49 per cent of charter capital in two commercial joint stock banks in Vietnam. However, this commitment is only effective within five years and is not applicable to the four state-run banks of BIDV, VietinBank, Vietcombank, and Agribank.
For Vietnam’s export of goods, the EU will eliminate around 85.6 per cent of import tariffs. After seven years from the effective date of the EVFTA, about 99.2 per cent import tariffs will be eliminated. Vietnam also creates favourable conditions for European investors in transportation, distribution, telecommunications, and financial service sectors under this agreement. These commitments may raise the interest of foreign investors in manufacturing and distribution industries and stimulate M&A activities in these industries in Vietnam over the next decade.
Further legal facilitation
Last August the Politburo issued Resolution No.50-NQ/TW on perfecting mechanisms and policies, as well as raising quality and efficiency of foreign investment in the next decade. Laws on investment, securities and foreign exchange control will be amended to separate indirect and direct funding.
At the same time, related laws will be revised to be consistent on governing the accounts used for share purchases and transfers.
The government has actively taken several actions including amendments of key laws governing M&A transactions to woo foreign investment. The amendments of these laws are aimed to save time and costs, and reduce unnecessary procedures. The issuance of the new Law on Securities is expected to reduce the foreign ownership limit and enhance the share issuance conditions and risks that such financial backers may face when injecting their cash into Vietnamese enterprises.
In order to govern the competitiveness of Vietnam’s market, the new Law on Competition was issued in 2018 and took effect last July. The decree providing guidance for the law is expected to be issued in the first quarter of 2020. According to the draft decree on guidance of the Law on Competition, the pre-merger filing requirement applies to M&A reaching certain thresholds.
They include total asset value in Vietnam of an enterprise being at least approximately $86 million; total value of the transaction being at least approximately $43 million; total sale or purchase revenue in Vietnam of an enterprise being at least approximately $86 million; and combined market share of the relevant enterprises reaching at least 20 per cent.
Subject to these thresholds, most M&A deals will be subject to the pre-merger filing procedures requirement with the Vietnamese competition authorities.